THE EFFECT OF INTERNAL AND EXTERNAL MECHANISM ON CORPORATE

SOCIAL RESPONSIBILITY DISCLOSURE

THE EFFECT OF INTERNAL AND EXTERNAL MECHANISM ON

CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE

Astrid Rudyanto 1*5

1
STIE Trisakti, Indonesia

Abstract
Corporate social responsibility disclosure should be controlled by internal and
external mechanism to make sure that company is doing its business morally. Board of
commissioners are responsible for supervising company from internal. This study uses
board (of commissioner) diversity as internal mechanism. Board diversity is measured
by board size, women on board , and board tenure. Public visibility acts as external
mechanism to watch corporate social responsibility disclosure. Public visibility is
measured by firm size, profitability, and listing age. Corporate social responsibility
disclosure is measured using content analysis made by Sembiring (2005). This study
aims to examine the effect of board diversity and public visibility on corporate social
responsibility disclosure. Using 177 manufacturing companies listed in Indonesia
Stock Exchange in the period of 2013-2015, the result shows substitution association
of internal and external mechanism on corporate social responsibility disclosure. This
shows that one of those mechanisms is enough to increase corporate social
responsibility disclosure and regulator shall consider external mechanism for making
regulation on internal mechanism.
Keywords: board diversity, corporate social responsibility disclosure, external
mechanism, internal mechanism, public visibility

1. INTRODUCTION
Since 2007, Indonesian government has required listed companies disclose
corporate social responsibility with the hope of making it as the bridge of the
commercial companies profit and moralist corporate social responsibility. However,
there are still tremendous numbers of corporate social responsibility violation in
Indonesia, for instance in 2016, the case of PT Jaya Mestika Indonesia, one of the listed
manufacturing companies, which dumped its hazardous waste recklessly (Detik, 2016).
If the government law cannot make the listed companies to do social responsibility,
who can? Purwanto(2011) indicates that making corporate social responsibility as a
mandatory disclosure is just degrading social responsibility into social obligation.
Responsibility should be coming from companies’ morality. Nonetheless, it is
extremely hard to rely on companies’ morality. There has to be special supervisory
mechanism to enforce companies to become moralist.
The supervisory mechanism divided into two groups, which are internal and
external mechanism. The internal mechanism is board of commissioner. Board of
commissioner is board that has supervisory role to board of director (Pemerintah
Republik Indonesia, 2007). The diverse characteristics of board of commissioner
members are crucial in companies’ decision, especially when it comes to corporate
social responsibility. There are at least two reasons. First, the board diversity oblige
company to reveal diversity practice, which is desired by stakeholders in making
corporate social responsibility activities and reports(Bear, Rahman, & Post, 2010).
Second, by having diverse board with different expertise, company will get valuable
information and consideration in decision making, especially regarding corporate
social responsibility (Handajani, Subroto, & Erwin, 2014).The external mechanism is
from public, which is public pressure. The more visible the company is, the more
pressure it gets from society and the more disclosure it has to publish to hinder the
negative reaction (Branco & Rodrigues, 2008).

* Corresponding author. Email address : astrid@stietrisakti.ac.id

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Previous researches concentrate on director’s role on corporate social

responsibility disclosure(Frias-Aceituno, Rodriguez-Ariza, & Garcia-Sanchez, 2013;
Kathy Rao, Tilt, & Lester, 2012; Rao & Tilt, 2016a) and do not evaluate supervisor’s
role on corporate social responsibility disclosure. Recent papers are only focusing on
external mechanism (Brammer & Pavelin, 2006; Branco & Rodrigues, 2008; Yao,
Wang, & Song, 2011)or internal mechanism (Eng & Mak, 2003; Handajani et al., 2014;
Rao & Tilt, 2016b)only. This study fills the gap by using both the effect of internal
mechanism (board diversity) measured by board size, board tenure, and women on
board, and the effect of external mechanism (public visibility) measured by
profitability, company size, and listing age to corporate social responsibility disclosure.
This research contributes on corporate governance and corporate social
responsibility research by analyzing the relationship between internal and external
mechanisms in increasing corporate social responsibility disclosure. This research also
contributes to regulator in making corporate governance regulation by considering
company’s public visibility to increase corporate social responsibility disclosure more
efficiently.

2. LITERATURE STUDY/HYPOTHESES DEVELOPMENT

According to legitimacy theory, companies have social contract with the society
around them to be legitimate to ascertain companies’ survival (Deegan & Unerman,
2011; Tilling, 2004). The contract enforce companies to fulfil or exceed society’s needs
to survive in market competition (Zheng, Luo, & Maksimov, 2015). The society, which
is directly or indirectly related to companies,whose needs should be fulfilled is called
stakeholder. Stakeholder is a group or individual that influences companies’
achievement(Velasquez, 2012). Stakeholder theory states that the companies’ purpose
is not only shareholders’ wealth but also stakeholders’ wealth. Stakeholders’ wealth
can be achieved by fulfilling stakeholders’ needs, balancing conflict among them, and
building good relationship with them with the help of corporate social responsibility.
Corporate social responsibility is organization’s responsibility to environment and
society for its decision and activities through ethical and transparent action which
contributes to sustainable development, including society’s health and well-being,
considers stakeholder expectation, are in accordance with applicable laws and norms
of conduct, and is integrated within the organization thoroughly (ISO, 2010).
Companies should disclose their corporate social responsibility as a form of
accountability to stakeholders and thus show stakeholders that they are able to achieve
stakeholders’ wealth(Zheng et al., 2015). Although listed companies in Indonesia are
required to disclose their social responsibility, there is no standard for social
responsibility disclosure. Therefore, corporate social responsibility disclosure depends
on the makers, which are companies’ managers, and owners, which are shareholders.
However, depending on the companies’ managers and owners only can not guarantee
the disclosure quantity because they may have different moral values and different
interests (according to agency theory)(Rao & Tilt, 2016b). This is where supervisory
role is needed.
Indonesia use two-tier system, system that separates board of director as executor
and board of commissioner as supervisor(OECD, 2015). Internal mechanism of
supervisor (board of commissioner) is proven to associate with corporate social
responsibility disclosure (Eng & Mak, 2003; Handajani et al., 2014; Rao & Tilt,
2016b). According to resource dependence theory, companies select their resources
carefully to minimize external factors, which may influence them (different
stakeholders’ interests, uncertainty in moral values and different interests between
owner and manager) (Pfeffer & Salancik, 1978). Companies have to select their board
of commissioners carefully to control all the uncertainties from external factors as

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SOCIAL RESPONSIBILITY DISCLOSURE

board of commissioners are internal mechanism used to build relationships between

companies and stakeholders. Variety of board of commissioner members increases
value in discussion(Carter, Simkins, & Simpson, 2003) and increases the quality of
decision and analysis (Fairfax, 2005). Board of commissioner has crucial role in
decreasing agency conflict between manager and stakeholder by monitoring corporate
social responsibility activities and disclosing these activities to gain legitimacy. Hafsi
dan Turgut (2013)say that the diversity of the board of commissioners can be divided
into two groups, structural diversity and demographic diversity. Structural diversity is
the size, independence, share ownership, and duality of the board. Demographic
diversity in the form of gender, ethnicity, age, board experience. This study uses a
structural diversity component (board size) as well as demographic diversity (women
on board and board tenure).
Board size is the number of board of commissioner in a particular time(Handajani
et al., 2014). Board size association on corporate social responsibility disclosure are
inconclusive. There is evidence in support of a positive impact of frequency, but there
is also evidence to the contrary. Argument from agency theory said that larger boards
tend to have larger agency problem due to conflict of interest and coordination issues.
Larger boards also could result in flawed incentives in terms of free rider
behavior(McConnell & Servaes, 1990) and reduces flexibility and dynamism in
decision making process such as in making corporate social responsibility activities
and disclosing it(Dienes & Velte, 2016). On the other hand, resource based theory
suggests that more board members will generate more exchange of ideas and
experiences and the larger the number board of commissioners the stronger influence
they have to pressure management to reveal more corporate social responsibility
information (Handajani et al., 2014; Said, Hj Zainuddin, & Haron, 2009). More boards
also results in more time and more specialist resources to supervise corporate social
responsibility disclosure process(Dienes & Velte, 2016). Although debatable, most
researches in Indonesia find positive association of board size and corporate social
responsibility disclosure(Handajani et al., 2014; Putra, 2009; Sembiring, 2005; Siregar
& Bachtiar, 2010). In addition, Majeed et al(2015) conclude that board size informs the
level of disclosure and transparency of a company. Larger board equals to larger
transparency and disclosure.

Ha1: board size is positively associated with corporate social responsibility

disclosure

Women on board is the number of women in board of commissioners chair

(Handajani et al., 2014). The existence of women on board adds unique and different
perspective, experiences and work style in relation to male
commissioners(Giannarakis, 2014). Researches indicate that women are more
concerned with altruism which leads to more pro-social behavior(Kruger, 2010).
Women are more charitable(Williams, 2003) and corporate social performance
oriented which leads to increase in company’s reputation(Bear et al., 2010). Company
with the ratio of the number of female boards has a strong and positive relationship to
social responsibility with respect to employee welfare(Handajani et al., 2014).The
existence of women boards can make companies more aware of social responsibility
and provide a better perspective when formulating social responsibility programs and
disclosures (Williams, 2003).The existence of the number of female directors in the
board structure also increases the commitment to carry out social activities in order to
improve the welfare of the community around the company. This is because of the
awareness that the implementation of corporate social responsibility has a good impact

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for the company in the future (Bear et al., 2010). Even some countries have initiated to
increase the role of women in boards, such as Norway, Sweden, Spain, France and Italy
(Rao & Tilt, 2016b).
However, psychology researcbes also prove that women are more risk averse and
tend to prevent risky projects(Byrnes, J.P., Miller, D.C., Schafer, 1999; Rutterford &
Maltby, 2007). Corporate social responsibility activities are risky projects because its
effects are invisible and need long term commitment(Perez-Batres, Doh, Miller, &
Pisani, 2012; Simsek, Veiga, & Lubatkin, 2007). Therefore the existence of women on
board can also negatively associated with corporate social responsibility disclosure.
Despite the conflicted results, researches find more positive association than
negative association of women on board and corporate social responsibility disclosure.

Ha2: women on board is positively associated with corporate social

responsibility disclosure

Board tenure is the length of a member of board of commissioner within a

company. Board tenure has a two-sided impact on corporate social responsibility
disclosure. On the one hand, board tenure supporters say longer board tenure increases
the board's knowledge of the company (Kruger, 2010). Longer board tenure also allows
the board of commissioners to oversee senior managers, reduce vulnerability to
pressure, and reduce managers’ control (Livnat, Smith, Suslava, & Tarlie, 2015).
Longer board tenure is better at monitoring corporate activities as the boards can gather
valuable information and can disclose it to independent board members, which in turn
can improve the company's performance, including in disclosing its social
responsibility(Livnat et al., 2015). On the other hand, board tenure could reduce the
independence of the board of commissioners as it becomes more familiar with
companies managers (management friendliness hypothesis) (Vafeas, 2003). Berberich
and Niu (2011)found a positive influence between longer board tenure with governance
issues, such as bankruptcies, corporate scandals, litigation, and so on. It also affected
corporate social responsibility implementation and reporting.
The negative association of board tenure on corporate social responsibility is an
indirect impact. Kruger(2010) discloses the direct positive impact of board tenure on
corporate social responsibility whereby longer board tenure is more long-term oriented
which is more concerned about corporate social responsibility.

Ha3: board tenure is positively associated with corporate social responsibility

disclosure

Internal supervisory mechanism is not enough to make sure that companies will
pursue stakeholders’ wealth. Stakeholders have to supervise the companies as the
external supervisory mechanism. Legitimacy theory indicates that corporate social
responsibility is a response of public pressure and public visibility on social
incident(Patten, 1992). High public visibility level companies will get more supervision
from stakeholders and thus have more pressure to disclose more corporate social
responsibility activities. Previous researchers used many measurements to measure the
level of public visibility. Yao et al (2011) use customer proximity industry, media
exposure, and company age to measure the level of public visibility while Branco and
Rodriguez(2008) use company size, employee size, and profitability. This study uses
firm size, company age (listing age) and profitability. Listing age is used because when
the company is listed on the stock exchange, the level of its public visibility is higher
so that listing age is more suitable to measure the level of public visibility.

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SOCIAL RESPONSIBILITY DISCLOSURE

Company size is the most common measurement used to measure the level of
public visibility. Companies that have large scales usually do more disclosure of social
responsibility when compared with small-scale companies. Large companies usually
have more activities, complex, and have greater impact on society, have more
shareholders and get public attention (public visibility) and therefore large-scale
companies are under pressure to disclose their social responsibility(Brammer &
Pavelin, 2006; Schreck & Raithel, 2018).

Ha4: company size is positively associated with corporate social responsibility

disclosure

Profitability is a relationship between income and expense caused by the use of

a company's assets either current assets or fixed assets in the company's production
activities. The level of company profitability can attract the attention of stakeholders.
Profitability of a company affects level of public visibility of the company and thus
impacting the disclosure of its social responsibility(Gamerschlag et al., 2011). This is
because the higher the level of profitability, the higher the level of public visibility and
the greater the funds that can and should be allocated for social responsibility activities.
Hibbit (2003)argues that companies that present abnormally high levels of profits are
exposed to public pressures from relevant publics as if the companies operate in
socially sensitive industries.

Ha5: profitability is positively associated with corporate social responsibility

disclosure

Listing age is a length of time a company listed on the capital market as a public
company. Listing age is a critical factor to determine the extension of corporate social
responsibility disclosure and greatly affects the level of social responsibility disclosure
in company's financial statements (Bayoud, Kavanagh, & Slaughter, 2012). The longer
a company is listed on the capital market, the greater its level of public visibility and
thus affecting the level of its social responsibility disclosure (Khan, Muttakin, &
Siddiqui, 2013). The long-listed companies show their existence through activities
related to the community such as social activities. These activities are expected to
increase investor confidence(Bayoud et al., 2012).
On the other hand, newly listed in capital market shows that the company needs
more financing. To get more financing from shareholder, these companies disclose
more corporate social responsibility to gain legitimacy(Yao et al., 2011). Companies
that are long listed on capital market have less incentive to disclose corporate social
responsibility due to less financial problem.
Researchers find more results in positive association than negative association
between listing age and corporate social responsibility disclosure. Therefore, it is
hypothesized that listing age is positively associated with corporate social
responsibility disclosure.

Ha6: listing age is positively associated with corporate social responsibility

disclosure

Corporate social responsibility disclosure depends on the efficiency of a bundle

of mechanisms to mitigate agency problem. Internal and external mechanisms are both
mitigating agency problem(Rediker & Seth, 1995). The impact of any one mechanism
might be insufficient to achieve the alignment of manager-stakeholder interest but the

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overall effect of the bundle of mechanisms might be sufficient. On contrary, the impact
of any one mechanism might be sufficient to mitigate agency problem and do not need
all mechanisms. Rediker and Seth(1995) define in the context of regression
methodology. In this context, there might be an important consequences of omitting
relevant independent variables. If an omitted explanatory variable is not related to
independent variables, its omission may not have serious consequences for least square
estimation. However if it is related to independent variables, the estimated coefficient
of the included variable will be both biased and inconsistent. In terms of this research,
it might be that highly visible companies do not need strict or best supervisory to make
companies disclose their social responsibility better. The strict supervisory may have
reverse impact on corporate social responsibility disclosure, for example strict
supervision of shareholder oriented board of commissioners will restrain the company
to do and disclose social responsibility activities. This results in substitution effect of
internal mechanism and external mechanism on corporate social responsibility
disclosure. On the other hand, high visibility may not sufficient to push directors on
disclosing corporate social responsibility. Strict supervision from stakeholder oriented
board of commissioner encourage the company to disclose social responsibility
activities. These contradicting relationship has not been proven by previous researches.
Therefore:
Ha7a: internal mechanism and external mechanism in increasing corporate social
responsibility disclosure are substitutes
Ha7b: internal mechanism and external mechanism in increasing corporate social
responsibility disclosure are complementary

3. RESEARCH METHODOLOGY
Data are manually obtained from companies’ annual reports. This
research uses SPSS Statistics 19 with pooled data analysis. Multiple regression
is used to see the value of dependent variable based on multiple independent
variables values . The equation is as follow:
𝐶𝑆𝑅𝐷𝑖𝑡 = 𝛽0 + 𝛽1 𝐵𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽2 𝑊𝑂𝐵𝑖𝑡 + 𝛽3 𝑇𝐸𝑁𝑖𝑡 + 𝛽4 𝐹𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽5 𝑃𝑅𝑂𝐹𝑖𝑡 +
𝛽6 𝐴𝐺𝐸𝑖𝑡 + 𝜀𝑖𝑡 (1)
CSRD = Corporate Social Responsibility Disclosure
BSIZE = Board Size
WOB = Women on Board
TEN = Board Tenure
FSIZE = Firm Size
PROF = Profitability
AGE = Listing Age

Corporate social responsibility disclosure is measured according to

Sembiring(2005).This measurement is used because Sembiring tailored corporate
social responsibility disclosure measurement especially for Indonesian companies,
considering Indonesian circumstances and policies and there is no additional policy
regarding corporate social responsibility disclosure ever since. If the disclosure item is
exist in the company's annual report, it is assigned a value of 1 and if the item is not
exist it will be given a value of 0. The number of disclosure is summed and divided by
78, the maximum value.
Board diversity is measured by board size, women on board, and board tenure.
Board size is measured by the number of board of commissioner on board (Das, Dixon,
& Michael, 2015). Women on board is measured by the number of women in the board
of commissioner(Handajani et al., 2014). Board tenure is measured by the average
terms (years) board of commissioner working in the company(Kruger, 2010; Yao et
al., 2011)

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SOCIAL RESPONSIBILITY DISCLOSURE

Public visibility is measured by firm size, profitability, and listing age. Company
size is measured using natural logarithm of total assets owned by the company (Hafsi
& Turgut, 2013; Wang et al., 2011). Profitability is measured by net profit
margin(Gamerschlag et al., 2011). Listing age is measured from the length of the
company listed on the Indonesia Stock Exchange(Das et al., 2015).
This research focuses on corporate social responsibility disclosure in companies’
annual report for manufacturing companies listed in Indonesian Stock Exchange from
2013 to 2015. Annual report is used because social responsibility report contained in
the annual report is the type of report that was first produced and is the most common
report(Hackston & Milne, 1996). Manufacturing companies are used because
manufacturing companies are companies that have complex activities that enable
companies to engage in social activities and disclosures more transparently. In addition,
the manufacturing industry also has a higher risk of pollution, since waste generated
from the production process will be very dangerous if not treated properly so it is
suitable to be used in social responsibility research.
To prove substitution or complementary relationship between internal and
external mechanism, this research runs three separate multiple regressions on internal
and external mechanisms; ie. Multiple regression of internal mechanism and corporate
social responsibility disclosure, multiple regression of external mechanism and
corporate social responsibility disclosure, multiple regression of both internal and
external mechanism and corporate social responsibility disclosure.
This paper constructs the sample starting with all manufacturing companies
listed on fact book 2014-2016. Companies in the final sample meet the following
criteria:
1. The company is consistently listed in Indonesia Stock Exchange from 2013-2015
2. The company submits complete annual report and financial statement during 2013-
2015
3. The company has separate corporate social responsibility section in annual report
4. The company uses local currency (Rupiah) in financial statement and annual report
5. The company earns profit during 2013-2015
6. The company discloses board of commissioners’ tenure in annual report
From the criteria above, the number of samples is 59 companies or 177
observations.
4. RESULTS
Table 1 Descriptive Statistics
Std. Std.
Variables N Minimum Maximum Mean Deviation Variables N Minimum Maximum Mean Deviation
CSRD 177 0,0897 0,6026 0,2513 0,1243 FSIZE 177 25,6195 33,1341 28,3584 1,6932
BSIZE 177 2 11 4,29 1,926 PROF 177 0,0011 0,5087 0,0856 0,0765
WOB 177 0 3 0,33 0,60927 AGE 177 1 35 19,68 8,338
TEN 177 1,33 25.33 8,7865 5,65223

From Table 1, it can be seen that the board of commissioners in manufacturing

companies in Indonesia has an average of 4-5 people but only about 0-1 woman in the
board of commissioners. This shows how minimum the number of women in the board
of commissioners in Indonesia. Boards tenure in manufacturing companies in
Indonesia vary widely, ranging from 1 to 25 years, so do profitability (0-50%) and
listing age (1-35 years).

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Table 2 Pearson Correlation Test

CSRD BSIZE TEN PROF AGE FSIZE WOB
CSRD 1 .657** -.096 .453** .069 .644** -.153
BSIZE .657** 1 -.214* .154 .183* .726** -.176
TEN -.096 -.214* 1 -.005 .125 -.239** -.404**
PROF .453** .154 -.005 1 .016 .160 -.130
AGE .069 .183* .125 .016 1 .165 -.173
FSIZE .644** .726** -.239** .160 .165 1 -.016
WOB -.153 -.176 -.404** -.130 -.173 -.016 1
*significant in 10% ** significant in 5% , *** significant in 1%

Pearson correlation test show that board size, profitability, and firm size
are correlated with corporate social responsibility disclosure. However, these
correlations do not consider other variables associating with corporate social
responsibility disclosure. Therefore, t test is done.

Table 3 Hypothesis Test Results

coefficients sig coefficients sig coefficients sig
constant 0,085 0,015 -0,695 0,000
-0,955 0
BSIZE 0,039 0,000*** 0,015 0,002***
TEN 0,001 0,652 0,001 0,506
WOB -0,006 0,79 -0,029 0,012**
PROF 0,585 0,000*** 0,479 0,000***
AGE -0,001 0,595 -0,001 0,075*
FSIZE 0,041 0,000*** 0,031 0,000***
R 0,659 0,736 0,725
Adjusted 0,419 0,529 0,509
R
Square
*significant in 10% ** significant in 5% , *** significant in 1%

Before performing multiple regression analysis, the model test is

performed to see whether the data are fit, normal, no multicollinearity, no
heteroscedasticity, and no autocorrelation. The data used in this research are fit
(significant level of F statistics are 0,000), normal (0,761), no multicollinearity
(VIF are less than 10 and tolerance are more than 0,1), no heteroscedasticity
(significant levels are not less than 0,05), and no autocorrelation (significant
level of residual=0,462).
The hypothesis test is divided into 3 sections, i.e. internal mechanism,
external mechanism, and both. It is clear that external mechanism is more
strongly associated with corporate social responsibility disclosure than internal
mechanism or both mechanism. Considering internal mechanism only, board
size is positively associated with corporate social responsibility disclosure. This
association remains stable when external mechanism is considered, meaning
Ha1 is accepted. Women on board is negatively associated with the disclosure
of social responsibility when external mechanism are considered. Therefore,
Ha2 is not accepted. Board tenure does not associate with corporate social
responsibility disclosure in both models. Thus, Ha3 is not accepted Considering
external mechanism only, profitability and firm size are positively associated
with corporate social disclosure, meaning Ha4 and Ha5 are accepted. The
associations remain even after considering internal mechanism. Company
listing age is not associated with corporate social disclosure when only external
mechanism is exists. However, when considering both mechanism, listing age
is negatively associated with corporate social disclosure. Ha7 is not accepted.

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SOCIAL RESPONSIBILITY DISCLOSURE

Intrigued by debates over board tenure effect on corporate social responsibility,

this paper makes an additional research on how many years do board tenure associates
with corporate social responsibility disclosure. Byrd et al(2010) finds that board tenure
should be less than 6 years or it will harm board’s independence. Livnat et al(2015)
finds that board tenure should be less than 9 years on average. Vafeas(2003) uses
longer tenure, which is 20 years. Analysing these three criteria, surprising results are
shown on Table 4.

Table 4 Additional Test Results

Significance Significance Significance
6 years 0.028 9 years 0.003 20 years -0.572

Different from other researches, companies which have board tenure more than
6 years and 9 years have more corporate social responsibility disclosure while
companies which have more than 20 years of board tenure do not differ with companies
which have less than 20 years of board tenure. These results are surprising because
these show that Indonesian companies depend on their long lasting board of
commissioner. Even with twenty years length of time, short board tenure companies’
corporate social responsibility disclosure still cannot defeat long board tenure
companies’ corporate social responsibility disclosure, although there is a tendency.
These results also support the findings of listing age. The younger the companies are
listed in stock exchange, the less the corporate social responsibility disclosures are.
This may be due to short tenure board of commissioner they have to push the younger
companies to disclose their corporate social responsibility.
Companies which have higher profitability will give motivation to the manager
to provide more detailed information to show and account for the social program that
has been made by the manager(Hermawan & Mulyawan, 2014). Due to the high level
of public visibility, the companies must use their excess profits to gain legitimacy from
their stakeholders.
5. DISCUSSION
This study shows how internal mechanism and external mechanism’ role in
corporate social responsibility disclosure. Multiple regression test for both internal
mechanism and external mechanism shows that board size is positively associated with
corporate social responsibility disclosure. This is in line with resource dependence
theory that more boards results in more time and more specialist resources to supervise
corporate social responsibility disclosure process(Dienes & Velte, 2016). However,
board tenure does not have association with corporate social responsibility disclosure.
The conflicted association between board tenure and corporate social responsibility
disclosure which come from lack of independence and increased knowledge results in
no effect of board tenure on corporate social responsibility disclosure. This could be
indication of nonlinear relationship. Additional test shows that 6 years and 9 years
tenure are positively associated with corporate social responsibility disclosure but 20
years tenure has no association with corporate social responsibility disclosure. Women
on board are negatively associated with corporate social responsibility disclosure. This
shows that women on board in Indonesia manufacturing companies regards corporate
social responsibility as risky project. Therefore they do not support social responsibility
activities which equals to less disclosure on social responsibility activities.
Profitability and firm size are also positively associated with corporate social
responsibility disclosure. In accordance with legitimacy theory, companies that are
more visible need more legitimacy to survive. However, listing age is negatively
associated with corporate social responsibility disclosure. This shows that newly listed
companies need more financing and need more legitimacy which results in more
corporate social responsibility disclosure(Yao et al., 2011).

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To see the relationship between external mechanism and internal mechanism,

this study runs separate multiple regression on the association of each mechanism on
corporate social responsibility disclosure. Data shows interesting result. The
association of external mechanism and internal mechanism to corporate social
responsibility disclosure are substitution. The coefficient amount of internal
mechanism and external mechanism relation to corporate social responsibility
disclosure are bigger than they exist in the same time. The negative associations to
corporate social responsibility disclosure are also bigger when both mechanisms exist.
Without other types of mechanism, women on board and firm age does not associate
with corporate social responsibility disclosure. But when other types of mechanism
exist, they are negatively associated with corporate social responsibility disclosure.
Families own the majority of companies in Indonesia and women within the board are
from families who own the companies, not because of their competence(Yao et al.,
2011). In addition, because women on board represent the families, companies do not
need to disclose its social responsibility to the minority shareholders, the public,
because their majority shareholder (family) know how the companies are
operated(Rudyanto & Siregar, 2018). Agency theory states that information asymmetry
between majority shareholder and other stakeholders should be reduced by agency cost
This is severely triggered by company listing age. Young companies require greater
disclosure of corporate social responsibility because they require visibility from
investors and banks to get funding from them(Yao et al., 2011). Women on board in
old companies are usually coming from family. As the owner of the company, women
are more risk averse than men or than women in general(Rutterford & Maltby, 2007).
Family has agency problem with stakeholders and tend to maximize their own wealth
by not taking risky investment(Nekhili, Nagati, Chtioui, & Rebolledo, 2017) Making
corporate social responsibility activities and disclosing them are long term investment
which is very risky. Therefore, women on board in old firms are negatively associated
with corporate social responsibility disclosure.
The association of board size, board tenure, company size with corporate social
responsibility disclosure are stable, although the coefficients are decreasing. The larger
the board of commissioners size, the most likely the company is to disclose the social
responsibility. Board size increases the power to put pressure on management in
disclosing social responsibility, so the company which has larger number of board of
commissioner, is likely to disclose more social responsibility(Carter et al., 2003; Said
et al., 2009). The duration of board tenure does not associate with the disclosure of
social responsibility in Indonesia because the newly appointed board of commissioners
are largely the ex-board of directors. Long board tenure also can impair board of
commissioners’ independence(Vafeas, 2003), increase governance problem (Berberich
& Niu, 2011) and lack of critical thinking by board members(Rao & Tilt,
2016b).Therefore, the positive and negative association of board tenure and corporate
social responsibility disclosure collide, giving no association with corporate social
responsibility disclosure.
Large companies usually get attention from the public (public visibility).
Therefore, large-scale companies tend to do and disclose corporate social responsibility
activities more so that companies get legitimacy from stakeholders(Schreck & Raithel,
2018). This indicates that companies just have to choose one of the mechanism to
increase corporate social responsibility disclosure.

6. CONCLUSION
Internal and external supervisory mechanism are expected to positively
associated with corporate social responsibility disclosure. However, not all of the
mechanism are effective in increasing corporate social responsibility (women on board,
board tenure, and listing age). Women on board, board tenure, and listing age do not
increase corporate social responsibility maybe because there are other factors affecting
them. Women on board maybe affected by their roles as family in family firms. Board

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SOCIAL RESPONSIBILITY DISCLOSURE

tenure maybe because of reversing effect on longer tenure. Listing age maybe because
of board tenure. Further research is needed to find other factors associating with these
variables, with regard of their effect on corporate social responsibility to produce
valuable findings. Further research can also use other measurements for dependent and
independent variables to test whether these independent variables are truly associated
with corporate social responsibility disclosure. Board diversity can also be measured
by Blau Index or other structural and demographic diversity(Hafsi & Turgut, 2013).
Public visibility can also be measured by customer proximity industry(Rudyanto &
Siregar, 2018), media exposure(Yao et al., 2011),and employee size(Branco &
Rodrigues, 2008). Next researcher also can analyse how long the board tenure impact
is on corporate social responsibility disclosure and why the characteristic of Indonesian
companies are different with other countries.
This paper shows that internal and external mechanisms are substitutes. A highly
visible company does not need strict supervisory to increase corporate social
responsibility disclosure. Market pressure is effective enough to push companies to
disclose corporate social responsibility. This also proves that board of commissioners
in Indonesian companies are shareholder oriented.This paper is not without caveat.
Corporate governance variables are companies’ choice, thus those are endogenous
variables. However, this paper does not control this problem. This paper also only uses
manufacturing companies and do not consider other industries that maybe as close as
or maybe closer to social responsibility, such as environmentally sensitive industries.
This paper is also limited in data. Data limitation affects the association of independent
and dependent variables. Future researches should consider these limitations.
Regardless the limitations, this paper highlights how internal mechanism and
external mechanism role in corporate social responsibility disclosure. The results
contribute to policy making. Corporate governance is not ‘one size fits all’. Seeing how
internal mechanism and external mechanism are substituted, government shall not
force strong corporate governance mechanism when the company visibility is already
strong. This paper also contributes to corporate social responsibility paper by adding
knowledge of substitution effect of internal and external mechanism on corporate social
responsibility disclosure.

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